introduction to cme group equity index options · 4/24/2014 · weekly treasury options (wto)...

Introduction to CME Group Treasury Options and Equity Index Options

April 24, 2014 Presented by: Agha Mirza and Pete Mulmat

© 2014 CME Group. All rights reserved.

Disclaimer

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Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. All references to options refer to options on futures.

Swaps trading is not suitable for all investors, involves the risk of loss and should only be undertaken by investors who are ECPs within the meaning of section 1(a)12 of the Commodity Exchange Act. Swaps are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade.

Any research views expressed are those of the individual author and do not necessarily represent the views of the CME Group or its affiliates.

CME Group is a trademark of CME Group Inc. The Globe Logo, CME, Globex and Chicago Mercantile Exchange are trademarks of Chicago Mercantile Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago, Inc. NYMEX, New York Mercantile Exchange and ClearPort are registered trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc.All other trademarks are the property of their respective owners.

The information within this presentation has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this presentation are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience.

All matters pertaining to rules and specifications herein are made subject to and are superseded by official Exchange rules. Current rules should be consulted in all cases concerning contract specifications.

Copyright © 2014 CME Group. All rights reserved.

S&P 500®, and S&P MidCap 400™, are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by Chicago Mercantile Exchange Inc.

Nikkei 225™ are trademarks of Nihon Keizai Shimbun Inc. and have been licensed for use by Chicago Mercantile Exchange Inc.

NASDAQ-100® is a trademark of The Nasdaq Stock Market, used under license.


Treasury Options

Presented by: Agha Mirza

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© 2014 CME Group. All rights reserved. 4

Treasury Options Market Development

Blanketing the Yield Curve CME Group Interest Rate options products include Eurodollars, Treasury and Fed Fund based products, offering trading opportunities from gamma to vega


CME and Interest Rates Options Overview

Interest Rate Options ADV Q1-14 ADV YoY

Growth

Treasury Options 603,599 18%

Interest Rate Options Open Interest

3/31/2014 Open Interest

YoY Growth

Treasury Options 3,724,954 13%

Interest Rates Futures Options Options % Total

Q1-14 ADV 5,298,748 1,425,822 21%

Open Interest 17,793,267 25,070,248 58%

CME Total Volume Futures Options

Options % Total

Q1-2014 ADV 11,129,259 2,529,765 19%

Open Interest 47,949,449 42,452,026 47%

Options account for19% of Total Exchange ADV and 47% of Total Exchange OI

Options account for 21% of Total Exchange IR ADV and 58% of Total Exchange OI

Treasury Options ADV is up 18% YoY with ED Options ADV up 106% YoY

Treasury Options OI is up 13% YoY with ED Options OI up 102% YoY


Product Specifications Interest Rate Futures Globex Symbol Min Tick Value Min Tick

2-Year Futures ZT 1/4 of 32nd $15.625

5-Year Futures ZF 1/2 of 32nd $15.625

10-Year Futures ZN 1/2 of 32nd $15.625

T-Bond Futures ZB 1/32nd $31.25

Ultra Futures UB 1/32nd $31.25

Interest Rate Futures Options Globex Symbol Min Tick Value Min Tick

2-Year Options OZT 1/2 of 64th $15.625

5-Year Options OZF 1/2 of 64th $7.8125

10-Year Options OZN 1 of 64ht $15.625

T-Bond Options OZB 1 of 64th $15.625

Ultra Options OUB 1 of 64th $15.625

One point in the 30 Year bond futures is 32 ticks and is displayed as 133-29. Next prices would be 133-30, 133-31, 133-00,133-01, 133.02. - Each tick = $31.25.

One point in the 30 Year bond options is 64 ticks and premium is displayed as .59 Next prices would be .60, .61, .62, .63, 1.00, 1.01,1.02 - Each tick = $15.625.

• Treasury Options expire in the month preceding their named month. - For instance a June 10 Year Options will expire May 23, 2014

• Expiration day is the last Friday of the month as long as there are two subsequent business days.


Movement around Economic Events

Daily Price Range 10-Year Bond

March Average 17/32nd 31/32nd

3/7 – Unemployment 26.5/32nd 47/32nd

3/19 – FOMC 46/32nd 46/32nd

• On a typical day, the range of the 10-year note is about a half-point and then range of the T-Bond is about a full point.

• These ranges are significantly larger around significant economic events like unemployment Friday and FOMC Meetings.

• This presents huge opportunities for options traders.


• 2014 ADV of 607,000 contracts/day – up 18% over Q1 2013

• YTD electronic percentage 58%

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Treasury Options Overview

0%

10%

20%

30%

40%

50%

60%

70%

0

100

200

300

400

500

600

700

800

000’s

Treasury Options - Monthly Average Daily Volume ADV Electronic ADV Pit % Electronic


• Ability to trade outrights, strategies and covered/delta neutral strategies

• Deep liquidity in both outrights and strategies

• Market makers streaming quotes in all options

• Will often see tighter markets in spreads than in the outrights as noted above.

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Treasury Options on CME Globex

Straddle Market is 1.33 bid at 1.34

Outrights adding up to 1.32 bid at 1.35


• Traded 21 million contracts since January 2011 launch • 2013 Average Daily Volume of 43,000 contracts, • Weeklies on 10 Year Notes are highest volume weekly • Highest volume days around economic numbers and events such as FOMC and

Unemployment. • Increase in volatility, vertical and calendar strategies using WTO’s

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Weekly Treasury Options (WTO) Overview


Weekly Treasury Options (WTO) Overview

Weekly Treasury Options Globex Codes

Ultra Treasury Bond UB1-5

Treasury Bond ZB1-5

10 Yr. Note ZN1-5

5 Yr. Note ZF1-5

2 Yr. Note ZT1-5

• Available in 2,5,10, T-Bond and Ultra Bond - e.g. Bond Week 1 May ZB1K13

• Three weekly options listed at a time • Expire every Friday except when a standard serial

or quarterly expires. • Expiration calendar and FAQ’s at

http://www.cmegroup.com/wto

http://www.cmegroup.com/wto


Example: A trader is targeting the 123 puts following the FOMC meeting

• April 29-30 FOMC meeting

• Week 1 May expiring May 2nd, 2014 pinpoints that event and trades for significantly less premium that the June option which expires on May 23rd, 2014

• Anticipate rising yields following FOMC meeting and target the 123 put.

• Assuming mid market the Week 1 May 123 put would cost 8 ticks or $125.00 (8x15.625)

• The standard June 123 put would cost 17 ticks or $265.625 (17x15.625)

• Trading the weekly option offers significant savings in premium pinpointing the same event.

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Weekly Treasury Options (WTO) around economic events


• Insight into Treasury Options Open interest across the entire skew

• Ability to see strikes with largest day over day changes

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Open Interest Tool

Access here: http://www.cmegroup.com/iroptionsoi

http://www.cmegroup.com/iroptionsoi

http://www.cmegroup.com/iroptionsoi


• Estimates futures prices given a change in yield.

• 10 Year Note anticipate a move of 17 bps from 2.08 to 2.25.

• Estimates a futures price around 123.175

• Helps to pinpoint strikes

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Duration Tool

Access here: http://www.cmegroup.com/duration

http://www.cmegroup.com/duration



• Treasury Options Volume Report http://www.cmegroup.com/iroptionsvolume

• Open Interest Report http://www.cmegoup.com/iroptionsoi

• QuikStrike Essentials http://www.cmegroup.com/quikstrike

• Duration Tool http://www.cmegroup.com/duration

• Understanding Treasury Futures http://www.cmegroup.com/education/featured-reports/understanding-treasury-futures.html

• Eurodollar Mid-Curves http://www.cmegroup.com/education/featured-reports/conflicting-global-signals-complicate-fed-guessing-game.html

• Weekly Treasury Options http://www.cmegroup.com/education/featured-reports/itcm-treasury-2014-01-07.html

• Treasury Options and the U.S. Economy http://www.cmegroup.com/education/featured-reports/blu-putnam-us-unemployment-poised-to-dip-below-7-percent.html

• Options Fundamentals http://www.cmegroup.com/education/featured-reports/option-fundamentals-for-fixed-income-asset-managers.html

http://www.cmegroup.com/education/featured-reports/option-strategies-for-fixed-income-asset-managers.html

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Interest Rate Options Resources

http://www.cmegroup.com/iroptionsvolume

http://www.cmegoup.com/iroptionsoi

http://www.cmegroup.com/quikstrike


http://www.cmegroup.com/education/featured-reports/understanding-treasury-futures.html

http://www.cmegroup.com/education/featured-reports/understanding-treasury-futures.html

http://www.cmegroup.com/education/featured-reports/conflicting-global-signals-complicate-fed-guessing-game.html



http://www.cmegroup.com/education/featured-reports/itcm-treasury-2014-01-07.html












http://www.cmegroup.com/education/featured-reports/blu-putnam-us-unemployment-poised-to-dip-below-7-percent.html






















http://www.cmegroup.com/education/featured-reports/option-fundamentals-for-fixed-income-asset-managers.html


































Free Web-based Options Analytics Tool

• Visibility into Current and Historical Volatility by Strike

• Concise Volume and Open Interest Information

• Spread Analysis and Risk Graphs

• Options Pricing Analysis

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QuikStrike Essentials

Access here: www.cmegroup.com/quikstrike

http://www.cmegroup.com/quikstrike


Options on Equity Index Futures

Presented by: Pete Mulmat

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• The underlying is respective futures contract at CME - Option exercise results in a position in the underlying cash-settled Futures contract - Whereas security options, e.g. SPX, KOSPI and Taifex options, are settled in cash

• Contract size - Usually one underlying futures contract (i.e. one E-mini S&P 500 Futures contract size = $50 x the

futures price)

• Option price is affected by the underlying futures - Key factor affecting option prices is the underlying futures contract, i.e. its volatility and prices, not

the index

• Expirations types & Exercise style - Quarterly options – American style - Serial (Monthly) options – American style - End-of-month options – European style - Weekly options – European style

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Equity Options on Futures at CME


Example: E-mini S&P 500 Call, August 19 expiry, @ 1340 • Initiated on July 5th at a price of 31.50

- Each point worth US$50. - Buyer pays $1,575 in cash (i.e. $50 x 31.50)

• On August 19th, if the September E-mini S&P 500 futures is at - 1,340 or below option expires worthless. Investor abandons the option. - Above 1,340 option is “in-the-money.” Investor exercises the option.

• After exercise, investor owns a September E-mini S&P 500 index futures at a price of 1,340. The option position is extinguished.

• If the index futures price is then at 1,375.25, mark-to-market gain for the investor is 35.35 index points, or $1,762.50 ($50 x 35.35)

• Net gain is 3.85 index points or $192.50 ($50 x 3.85)

• There is a max loss for this option trade equal to option premium. Gains are potentially unlimited

Note: At times, investors intentionally buy in-the-money options in lieu of futures. This is particularly true if the premium is lower than the futures margin. There is no margin call on long options.

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Equity Options on Futures at CME


• Capital efficiency - Fully integrated with index futures - If delta hedge position is in the underlying futures, positions

will be combined in one portfolio for margin purpose

- Exercise/Assign into underlying futures – position collapses into a neat portfolio

• Tax simplicity - No tax lot accounting, wash-sale rules headache (with futures per se)

• Strategic / Tactical Applications - Buy/writes just got easier – no qualified covered call day counts, no dividend games confusing

issues, very simple tax treatment

- Long futures + short call = short put ~~~> if futures “called away”, re-establishing position is simply writing a put; interesting near-expiration strategies, e.g. playing put-call parity for late-stage volatility, etc.

- Expirations every week tactical moves are very feasible: e.g. short-dated options hedge for a long-term position around earnings, or key economic numbers, e.g. Non-farm payroll numbers, or short-term volatility spikes

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Futures Options vs. Securities/ETF Options

Options on E-mini S&P 500 Futures (“ES Options” thereafter)


Expiration & Settlement

• Quarterly Options - Expire Time: 8:30am, Chicago time - Settlement Price: Special Opening Quotation (SOQ) - Process: exercised into underlying ES futures which expires at the same time and would be cash

settled to the SOQ, thus the option settlement is equivalent to cash settlement

• Serial Options - Expire Time: 3:15pm, Chicago time - Settlement Price: Closing price of the underlying ES futures - Process: exercised into the next quarterly ES futures (i.e. August serial option => results in

position in September ES futures). Note: ES futures only offers quarterly expirations.

• End-of-Month & Weekly (“Short-term”) Options - Expire Time: 3:00pm, Chicago time - Settlement Price: Special Fixing Price, calculated based on the VWAP (Volume Weighted

Average Price) of underlying ES futures in the last 30 seconds of trading up to the 3pm (CT) close on expiration day

- Process: exercised into the next quarterly ES futures

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E-mini S&P 500 Options


• Dense expiration schedule (17 concurrent expirations) - 4 Quarterly expirations on 3rd Friday, March-cycle months - 3 Monthly (“Serial”) expirations on 3rd Friday, every month outside March quarterly cycle - 6 Monthly (“End-of-Month”) expirations on last business day, every month - 4 Weekly expirations on 1st, 2nd and 4th Fridays, every month

• Dense strike listings - Within 200 index points on current futures prices in increments of 5 index points, e.g. 1200, 1205,

1210, 1215, etc.

• Liquidity & Transparent valuation - Active market maker quoting on Globex - With a structured and highly liquid market, E-mini S&P 500 options are very conducive to

combination or strategy trades, e.g. option spreads and, more complicated structures like Accumulators / Deccumulators

• Flexibility offered by short-term expirations • Minimized credit risk

- Performance bond is guaranteed by CME Clearing, mitigating counterparty credit risk

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What can ES Options offer to you?


Weekly & End-of-month options on E-mini S&P 500 Futures

• Expiration day - End-of-Month options expires on the last business day of each month

- Weekly options expires on the 1st, 2nd and 4th Friday of the month (the 3rd Fridays are regular expiration days for quarterly and serial options)

• European Style

• No “contrarian instructions” - On their expiration day, EOM and weekly options will be automatically exercised if they are ITM or

abandoned if OTM.

• Settled to a Special Fixing Price (ESF) - Volume-weighted average of the E-mini futures contract trading during 2:59:30 and 3:00pm,

Chicago time

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ES Short-term Options Nuances


• Shorter term more flexibility to traders, executing trading strategies at any time

• No “contrarian instructions” more certainty to traders

• Minimize time value lower premium for same level of volatility

• Month-end options align with month-end accounting cycles

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Why Short-term Options are Popular?


Short-term Options % of Total E-mini

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

E-mini weekly % of total E-mini

E-mini EOM % of total E-mini

E-mini weekly+EOM % of total E-mini

13.6% 20.8%

7.1% 11.3%


Quarterly & Serial option expirations Weekly option expirations End-Of-Month option expirations

S M T W T F S S M T W T F S S M T W T F S1 2 3 4 1 1

5 6 7 8 9 10 11 2 3 4 5 6 7 8 2 3 4 5 6 7 812 13 14 15 16 17 18 9 10 11 12 13 14 15 9 10 11 12 13 14 1519 20 21 22 23 24 25 16 17 18 19 20 21 22 16 17 18 19 20 21 2226 27 28 29 30 31 23 24 25 26 27 28 23 24 25 26 27 28 29

30 31

S M T W T F S S M T W T F S S M T W T F S1 2 3 4 5 1 2 3 1 2 3 4 5 6 7

6 7 8 9 10 11 12 4 5 6 7 8 9 10 8 9 10 11 12 13 1413 14 15 16 17 18 19 11 12 13 14 15 16 17 15 16 17 18 19 20 2120 21 22 23 24 25 26 18 19 20 21 22 23 24 22 23 24 25 26 27 2827 28 29 30 25 26 27 28 29 30 31 29 30

S M T W T F S S M T W T F S S M T W T F S1 2 3 4 5 1 2 1 2 3 4 5 6

6 7 8 9 10 11 12 3 4 5 6 7 8 9 7 8 9 10 11 12 1313 14 15 16 17 18 19 10 11 12 13 14 15 16 14 15 16 17 18 19 2020 21 22 23 24 25 26 17 18 19 20 21 22 23 21 22 23 24 25 26 2727 28 29 30 31 24 25 26 27 28 29 30 28 29 30

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S M T W T F S S M T W T F S S M T W T F S1 2 3 4 1 1 2 3 4 5 6

5 6 7 8 9 10 11 2 3 4 5 6 7 8 7 8 9 10 11 12 1312 13 14 15 16 17 18 9 10 11 12 13 14 15 14 15 16 17 18 19 2019 20 21 22 23 24 25 16 17 18 19 20 21 22 21 22 23 24 25 26 2726 27 28 29 30 31 23 24 25 26 27 28 29 28 29 30 31

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CME 2014 HOLIDAYS Number of expirations available at anytime:

New Year's Day January 1 Independence Day July 4 - Quarterly = 4

MLK, Jr. Day January 20 Labor Day September 1 - Serial = 3

President's Day February 17 Thanksgiving Day November 27 - Weekly = 4

Good Friday April 18 Christmas Day December 25 - End-of-month = 6

Memorial Day May 26 Total = 17

2014 E-mini S&P 500 Options Expiration Calendar

January

April

July

October

February

May

August

November

March

June

September

December


• 33% are executed as part of a spread instrument

• Extensive spread instruments available on Globex - 5 Pre-Defined spread strategies: strangles, straddles, verticals, horizontals and butterflies

- User-Defined Strategies: can create other option spread types

- Unrecognized Strategies: generic strategies requested by user, can contain up to 26 outrights

- User-Defined Covered Options Strategies: created by combining option strategy with underlying outright futures well suited for volatility trading strategies

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Spread Capability on Globex


ES Option Growth

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

E-mini S&P 500 Options

Volume

OI


Liquidity

0

10,000

20,000

30,000

40,000

50,000

60,000

Chicago Time

ES Options ADV by Hour – Feb’14


Weekly & End-of-month options on E-mini S&P 500 Futures

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ES Short-term Options Volume Growth

0%

5%

10%

15%

20%

25%

30%

35%

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

Weekly EOM Regular Weekly & EOM YTD %

Other Major Equity Index Options


• E-mini Nasdaq-100 Options - Quarterly, Serial, EOM and Weekly options available

• E-mini Dow ($5) Options - Weekly options launching in May, 2014

• E-mini S&P Mid-Cap 400 Options

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Other Major E-mini Equity Options at CME


Coming soon… with expected launch in early 2014

Preliminary Contract Specification Contract Size One CME Yen Denominated Nikkei Stock Average futures contract

Trading Venue Globex Only

Tick Size • Outrights: 1 index points ( = ¥ 500) • Half Tick: 0.5 index points (= ¥ 250)

Strike Price Interval • Two Closest Quarterly Cycle and/or Serial Month Expiry Options: +/- 30% of reference index at 50 point strike price intervals; • Next Two Closest Quarterly Cycle and/or Serial Month Expiry Options: +/- 30% of reference index at 100 point strike price intervals.

Hours of Trading Mon – Fri: 17:00 (Prior Day) – 16:15, Central Time

Contract Months Two months in the March Quarterly Cycle (e.g. March, June, September, December cycle), two serial months (e.g. January, February, April, May, July, August, October, November)

Expiration Date and Time

• Quarterly: 4:15 p.m. CT on the Thursday prior to the 2nd Friday of the contract month • Serial: 3:00 p.m. Tokyo time on the 2nd Friday of the contract month

Exercise Procedure • Quarterly Options: American Style • Serial Options: European Style

Daily Settlement Time 15:15 CT

Settlement Expiration

• Quarterly Options: Option exercise results in a position in the underlying cash-settled futures contract. No “contrarian Instructions”. In-the-money Quarterly Options are exercised into expiring cash-settled futures, which settle to the Special Opening Quotation (“SOQ”).

• Serial Options: Option exercise results in a position in the underlying cash-settled Futures contract; No “contrarian Instructions”. A 3:00 p.m. Tokyo time price fixing based on the volume weighted average price of OSE Nikkei futures traded in the last 30 seconds of trading (2:59:30 to 3:00:00 p.m. Tokyo time) on serial option expiration day will be used to determine which options are in-the-money.

Daily Price Limits Options trading is not permitted during trading halts due to price limit events

Block Trade Eligible Yes

Min Block Size 50 Contracts

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E-mini Nikkei 225 Index Options

Resources and Tools


Strategies & Users

Futures/Options Retail Traders

Proprietary Traders Arbitrageurs Asset

Managers Option Strategies O Conditional Rebalancing O Outright Price Speculation F&O Arbitrage a.k.a. Program Trading F&O


• Covered call writing … - Equity traders may augment income in

neutral markets by selling call options - But this limits upside potential of bull

markets

• Sell call options Augments income in neutral market at risk of limiting upside potential

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Option Strategies


• Buying put protection… - traders may buy put options to lock-in

floor return in bear markets - But this comes at cost associated with

put purchase

• Buy put options Locks in a “floor

return” in bear market but limits upside gains

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Option Strategies


• Optimal strategy … - Recommended strategy is function of

market forecast - Many variations on these themes are

available using in-, at-, out-of-the-money options

• Bear Market Sell futures • Neutral Market Sell calls • Bull Market Buy puts

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Option Strategies


Quik Strike • Data on current and historical volatility by strike • Volume and open interest information • Spread analysis and risk graphics

• Delta sheets • Call and put theoretical values • Options and pricing analysis

Access here: http://www.cmegroup.com/tools-information/quikstrike.html

http://www.cmegroup.com/tools-information/quikstrike.html


Key Features

• Provides the previous day’s 15 most active strikes in terms of volume and open interest

• Includes a pre-defined range of strikes and maturities of both puts and calls

• Graphs the full volatility surface using a cubic interpolation spline

• Current report as well as an archive of previous 10 days of reports available

• Auto-generated every night around 2:00 a.m. CT

• Cover quarterly, serial, weekly and end-of-month expirations for E-mini S&P 500 and E-mini NASDAQ-100 options respectively

41

Volatility Surface Report

Access here: http://www.cmegroup.com/trading/equity-index/options-volatility-surface-report.html

http://www.cmegroup.com/trading/equity-index/options-volatility-surface-report.html

http://www.cmegroup.com/trading/equity-index/options-volatility-surface-report.html


Equity Option Page

Access here: http://www.cmegroup.com/trading/equity-index/equity-index-and-stock-index-options-on-futures.html

http://www.cmegroup.com/trading/equity-index/equity-index-and-stock-index-options-on-futures.html

Thank you

introduction to cme group equity index options · 4/24/2014 · weekly treasury options (wto)...

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